Articles by Levick Experts

More than ever before, outside directors who sit on company boards are asserting their authority and assuming greater responsibility to ensure corporate operations are smooth – and to avoid a crisis. Although it’s not a board’s mission or responsibility to manage a company, these days the strategic oversight that independent directors can provide increasingly comes to the forefront across a range of issues – but none more tangible than in times of crisis.

Not surprisingly, the Sarbanes-Oxley Act of 2002 is a major driver of this sea change. SOX mandated, among other things that only independent directors with no affiliation to the companies they served could sit on certain board committees. This measure not only gave boards more independence, but more responsibility – and liability – as well.

For example, in a banner class-action lawsuit against WorldCom led by the New York State Common Retirement Fund, the telecommunications giant’s independent directors were ruled negligent and personally liable for a portion of the company’s losses, which directors were ordered to pay out of their own pockets. This outcome shivered the spines of independent directors everywhere, reinforcing the serious nature and potential consequences of their duties, and also catalyzing a new awareness of the greater crisis management roles that they would now have to play.

In light of such increased personal responsibility and liability, independent directors have an even greater vested interest in building and protecting the reputation of the companies whose boards they sit on. As a result, the burden on directors to know more as well as do more increases exponentially. For example, when Jerry Levin became CEO of what was then Sunbeam Corp. in the late 1990s, he was surprised at how little the board knew about the accounting problem that was then roiling the corporate waters. That wouldn’t happen today.

Because their overall responsibilities as directors are unique, so too are the specific strategic actions they can take in a crisis situation, which might include:

• Create an action team whose sole responsibility is to focus on the crisis and then report back to the board.
• Ask questions. The critical component of strategic oversight is digging for the truth. Independent directors must take all top managers, not just the CEO, to task when a crisis occurs by asking the right questions, no matter how unwelcome those questions. And once those questions have been asked, keep asking them to be sure the answers remain consistent.
• Hire board-only advisers. To provide necessary expertise and objectivity, boards must circumvent management when necessary and bring in outside legal, accounting, and communications counsel.
• Continue to advise on other company matters without being distracted by the crisis.
• Define and conform to limits. A more hands-on approach in times of crisis is often unavoidable for independent directors, but there are usually limits. As attorney Allan Reich told the Wall Street Journal (March 19, 2007), “The board should never supplant the CEO’s authority unless the CEO really lies at the heart of the crisis.”

Finally, and especially in a post-SOX environment, boards must be chosen with an eye to the broadest, as well as deepest, available expertise. There was, for example, a dearth of bankruptcy expertise among HealthSouth Corp. directors in the post-Richard Scrushy period that protracted the discussion of whether or not to even seek bankruptcy protection.

Such cases suggest a need to elect outside directors in the same way as companies assign crisis teams – with an abiding need to cover all bases and anticipate multifaceted corporate contingencies. In turn, directors should be given the training they need in order to perform their roles.

Being the director of a publicly-traded company today is a momentous task – and one that has never been so critical.